Forming a Delaware Corporation
Best Practice Summary

by Heather Jefferson, Esq., Judy Kaiser and Denise Annunciata

Quick Reference:

Delaware incorporations are governed by the General Corporation Law of the State of Delaware 8 Del. C. § 101 et seq.

LeapLaw's state pages summarize incorporation and qualification requirements in 50 states as well as a quick reference to laws for foreign registration purposes, as well as corporate name requirements, initial forms and the secretary of state link.

Checklist
Completing a checklist at the onset of the incorporation process may make completion of incorporation documents move faster. LeapLaw's Incorporation Checklist represents the basic information typically required for incorporation.


Incorporation Steps

Name Requirements

A Delaware corporation's corporate name must contain the word "association" "company" "limited" "corporation" "club" "fund" "union" "foundation" "society" "incorporated" "institute" "syndicate" or abbreviation thereof. Generally, the corporate name may not contain the word “bank”, or any variation thereof, without the consent of the Delaware Bank Commissioner.

Name Availability
It is strongly recommended to check name ava

ilability of a desired business name as soon as possible in all of the states where the company plans to be incorporated and qualified. Name availability in Delaware may be preliminarily determined online. If you want to check the name in other jurisdictions, you may check online using LeapLaw's Corporate Connection.

If the name is available, reserving it may be wise if the filing will be made at some later date.

Note: A secretary of state's acceptance of a business name does not mean the name is an available trademark or service mark. Other searches may be required if the company plans to determine any potential trademark or service mark issues. It is good practice to verify with the responsible attorney if the company will require a trademark search and/or domain name registration prior to reserving the name in any states.

If the Secretary of State deems the proposed name to be unavailable due to a name conflict with a currently registered business name, more information is provided on LeapLaw's Selecting a Business Name Best Practice Summary.

Preliminary Trademark Searches

It may be desirable to perform a preliminary trademark search to assure that a proposed corporate name is not deceptively similar to an existing mark. Preliminary searches for registered trademarks may be performed for free on LeapLaw's Intellectual Property Connection.

Note: A trademark or service mark does not have to be registered to be protected. Simply using the mark in commerce gives rise to a claim.

The popular "full" trademark search provides a comprehensive search of a proposed trademark against current federal, state and common law trademarks and domain names. Full searches may be ordered from a trademark search company such as Thomson & Thomson (800) 692-8833 or Corsearch (800) 732-7241. The report provides extensive information regarding trademark availability. For more information on trademarks and service marks, see LeapLaw's Trademark Best Practice Summary.

Domain Names

Domain names are registered web site addresses or "URLs". When registering domain names it is best practice to reserve all possible applicable name indicators if the name will serve as the main corporate name. Domain names may be checked for availability and obtained at Network Solutions. Network Solutions WhoIs can assist in determining current owners of a domain name. Checking the availability of the domain name simultaneous with checking the corporate name availability and trade name status is good practice if the company name is to be a trade name for the business.


Certificate of Incorporation

A corporation does not exist until the initial Certificate of Incorporation has been filed with the Delaware Secretary of State.

Standard Delaware Certificate of Incorporation provisions under 8 Del. C. § 102 include:

  • Exact corporate name.

  • Registered Agent Name and Address.

  • Purpose. A general purpose is sufficient.

  • Authorized Stock. Number of authorized stock with any classes, series and/or designations.

  • Undesignated Stock. The Certificate may simply authorize a maximum number of shares of all classes and series of stock that may be issued and authorize directors to designate the terms of any shares as necessary.
    NOTE: The maximum number of shares of stock that may be issued for the minimum franchise tax fee is 3,000 shares, $.01 par value.
  • Name and address of incorporator.

The statute sets forth other provisions that may be included. See 8 Del. C. § 102(b). Following the filing of the Certificate of Incorporation, information contained in the Certificate may be amended and/or restated. More information regarding charters, amendments, changes and corrections may be found at LeapLaw's Charter Best Practice Summary.

Filing the Certificate of Incorporation
Once the Certificate of Incorporation is completed and signed, the certificate is filed with the DE Secretary of State. Conformed signatures are accepted in Delaware, meaning that the signature is typed on the form in a specific format, signifying that the original signature in on file. The acceptable format is /s/ John Doe. The base filing fee is $89.00. Certified copies and expedited services add additional fees.

Need assistance? Virtual Paralegal Services provides services that include appointing a registered agent and filing services in all 50 states. For more information contact us at [email protected].

 

Incorporator's Statement

The incorporator takes the following actions in lieu of an organizational meeting:

  • Approve the Certificate of Incorporation as filed.
  • Fix the number of and elect the initial directors.
  • Adopt the initial bylaws.
  • Appoint resident agent.

Bylaws

Bylaws prescribe provisions that govern a corporation's internal affairs in a manner that is not otherwise inconsistent with Delaware law or the Certificate of Incorporation. Initial bylaws may be adopted by the incorporator. Typical provisions contained in the bylaws are:

  • Fixing the date of the annual meeting;
  • Fixing the record date;
  • Required quorum for voting purposes;
  • Voting rights of stockholders and directors;
  • Directors' authority;
  • Titles and responsibilities of officers;
  • Fiscal year end; and
  • Power to amend.

For more information about Bylaws see LeapLaw's Bylaws Best Practice Summary.
Delaware Bylaws

Directors Organizational Consent

Following the organizational meeting of the incorporator(s), the initial board of directors, (which shall consist of 1 or more directors) holds an organizational meeting to further set up fundamental business matters. The organizational consent of the initial board of directors will:

  • Ratify incorporator’s actions
  • Elect the remaining officers (in addition to incorporator’s elections, if any)
  • Adopt bylaws (if not otherwise adopted by incorporator)
  • Authorize the opening of a bank account
  • Authorize issuance of stock (including stock subscription agreements, if any)
  • Adopt a stock certificate
  • Authorize a lease
  • Authorize the qualification of the company in any foreign states
  • Authorize the election of an S Corporation (see below), if applicable
  • Any other general business items.
Organizational Consent of Directors


Federal Identification Number

The Internal Revenue Service issues federal identification numbers (FIN) also known as an Employer Identification Number (EIN) to new corporations. To apply for an FIN, an IRS Form SS-4 (pdf) must be filed with the IRS. As of January 2, 2002, Form 2848, Power of Attorney is no longer necessary for third-party designees. Completing the the new "Third Party Designee" section on the Form SS-4 will suffice.

Tax identification numbers may be provided:

  • Online in just a few minutes.

  • Via telephone to a third party by calling (866) 816-2065 Monday through Friday, 7:30 a.m. to 5:30 p.m. so long as the Third Party Designee section has been completed.

LeapLaw's Federal Identification Number Checklist provides a list of information for completing the Form SS-4. LeapLaw's Federal Identification Number Best Practice Summary provides more information regarding federal identification numbers.


S Corporation Election

The federal government and nearly all states impose double taxation on corporations by taxing the corporation's income and then stockholders' profits/dividends. Double taxation may be avoided if a corporation qualifies for and elects to become an S Corporation under the Internal Revenue Code ("IRC"), Section 1361.

To qualify, the corporation must:

(a) have no more than 100 stockholders (members of the same family - up to 6 generations, their spouses and former spouses may be treated as one stockholder. Each person who may receive a distribution from an ESBT "Electing Small Business Trust" is counted as one stockholder) (first effective for taxable years after December 31, 2004);
(b) have as its only shareholders individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A);
(c) have only one class of stock meaning that all outstanding stock has identical rights to distributions and liquidation proceeds;
(d) be a U.S. corporation;
(e) have no non-resident alien stockholders;
(f) not be a bank, insurance company, domestic international sales corporation ("DISC") or a corporation that has elected to be treated as a corporation under IRC Section 936;
(g) obtain the consent of all stockholders on Form 2553.

The Organizational Consent of Directors authorizes the corporation to become an S Corporation. IRS Form 2553 (Election of Small Business Corporation) (pdf) must be filed with the IRS via certified mail, return receipt requested within 2 1/2 months of incorporation or the first issuance of stock (with some other exceptions) at the IRS Service Center where the taxpayer will be filing tax returns.

TENTH: Stock

Stock Issuance
A corporation authorizes stock in its Certificate of Incorporation and issues stock as soon as practicable following incorporation. All authorized stock may, but need not be, issued. The total authorized stock, however, must always be equal to or greater than the amount of issued stock.

Best Practice Tip: Until stock is issued to a stockholder, the incorporator holds the role of stockholders and will vote to amend the Certificate or in any other matters that would otherwise be reserved for stockholders.

Stock issuance is authorized in the organizational consent of directors and is issued in exchange for some consideration, which may be cash, any tangible or intangible property or any benefit to the corporation, or any combination thereof. Stock issuance may also be conditional upon the stockholder entering a stockholders’ agreement, stock subscription agreement, a stock transfer restriction agreement or some other restrictive agreement. Once stock is issued pursuant to the conditions listed above, it is said to be "issued and outstanding" stock. The stockholder then holds “authorized, issued and outstanding" stock.

Sample Stock Subscription Agreement

Stock Certificates
Stock must be represented by a certificate unless the the bylaws or the directors consent to provide for uncertificated stock. If stock is uncertificated, ownership is tracked and recorded in the stock ledger but shares are not evidenced by a stock certificate. Stockholder rights are not impacted whether or not shares are represented by a certificate.

Best Practice Tip: Stock certificates have an inventory control number at the bottom left hand corner, such as GOES 352. This number identifies the certificate so that ordering the certificates using this number will render the exact type and color certificate needed. Stock certificates may be ordered via Lawyer's Stationery.

Stock certificates may be produced manually by using Microsoft Word. Getting a stock certificate in the correct format in Microsoft Word can be very time consuming. LeapLaw has certain stock certificates formats prepared. The easiest stock certificate to prepare in our opinion is GOES 740.

Need assistance? Contact Virtual Paralegal Services at [email protected]. Learn more about Virtual Paralegal Services

Legends
Legends are stock restrictions placed on the back side of stock certificates to notify potential transferees of any restrictions on transfer. These might be restrictions based on S corporation regulation, a certain stockholder agreement, restrictions related to class and many other matters.

Restrictions are placed on stock certificates in compliance with Section 8-204 of the Uniform Commercial Code which states, in part, that "unless there is a conspicuous notation of the restriction application to the stock transfer or unless the transferee has actual knowledge of the restriction, the purchase of stock will be free from restrictions." Therefore, in order to be sure that stockholders will not violate an agreement or some other restriction and provide stock free from restrictions on transfer, legends must be conspicuously placed on each certificate.

At the very least, common practice dictates that the following legend appear on stock issued for new companies:

"The shares of stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, assigned, pledged or otherwise transferred in the absence of an effective registration statement under the Securities Act of 1933 covering the transfer or an opinion of counsel satisfactory to the issuer that registration under the Securities Act of 1933 is not required."

Stock Receipt
A company may maintain the original stock certificate or a stockholder may choose to possess the stock certificate. If the stockholder opts for possession, a copy should be made of both sides of the certificate and kept with the stock records of the company together with a receipt evidencing the stockholder has received the stock certificate. The receipt may be the stub of the certificate or a separate stock receipt.

Stock Ledger
All issued stock is tracked manually on a stock ledger or electronically using software programs such as Corporate Compliance Manager that manages all company records including stock, options and warrants tracking.

Additional information on stock issuance may be found at LeapLaw's Stock Issuance Best Practice Summary.

ELEVENTH: Qualifications
A corporation is initially recognized as a legal entity only in its state of incorporation or formation. State laws of each state provide that business entities wishing to “do business” in that state and are not incorporated in that state to"qualify" by filing a foreign corporation certificate or the equivalent thereof with the secretary of state.

State laws regarding foreign qualifications vary and should be checked. Generally, however, a company does not need to qualify in a state in order to carry on any of the following activities in that state:

(a) hold a meeting of directors
(b) maintain a bank account
(c) sell and/or distribute products without a binding contract
(d) maintain offices for transfer, exchange or registration of securities

Generally, a company should qualify when it plans to have:

(a) an office
(b) employees
(c) owns real estate or
(d) desires to be a general partner of a domestic partnership in a foreign state.

Companies doing business without proper qualification or registration are subject to statutory penalties. State laws vary as to what constitutes doing business, responsibilities of qualified companies and penalties for not qualifying. A vote authorizing the qualification in each state should be included on the director's organizational consent.

For additional information and steps in the qualification process, see LeapLaw's Qualification Best Practice Summary. Qualification forms may be found at LeapLaw's Corporate Connection or on LeapLaw's state pages.

TWELFTH: Minute Books
A corporate minute book is the record book of corporations required by law and will contain:

  • Certificate of Incorporation and any amendments, changes or corrections thereto (the "charter")

  • Bylaws and any amendments or restatements thereto

  • Incorporator consent

  • All of the directors and stockholders consents or minutes to organizational, annual and special meetings

  • Stock certificates and stock ledgers (if not maintained in a separate binder and/or location such as a transfer agent)

  • IRS filings such as the SS-4 or 2553

  • State qualification documents

  • Copies of annual report filings

More information on creating and maintaining minute books may be found at LeapLaw's Minute Book Best Practice Summary.

Need assistance? Virtual Paralegal Services provides services that include preparing PDF or hard copy minute books. For more information contact us at [email protected].

LeapLaw's
Related Best Practice Summaries

Bylaws
Corporate Charters
Federal Identification Number
Filing Mechanics
Minute Books
Name Reservations
Qualification
Selecting a Business Name
Service Companies/Registered Agents
Stock Issuance
Trademarks and Service Marks


About Heather Jefferson, Esq. and Judy Kaiser: Judy is a veteran corporate paralegal and Heather is a partner at The Delaware Counsel Group, LLP ("DCG"), a law firm located in Wilmington, Delaware. DCG routinely serves as Delaware counsel providing Delaware opinions, advice and guidance on Delaware entities. Members of the firm are appointees to the committees that recommend legislative changes to the Delaware statutes. For more information about Judy, Heather or DCG, please visit the firm’s web site at www.delawarecounselgroup.com


 
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